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Firm-Specific Capital, Nominal Rigidities and the Business Cycle

  • Altig, David

    ()

    (Federal Reserve Bank of Cleveland)

  • Christiano, Lawrence

    ()

    (Northwestern University)

  • Eichenbaum, Martin

    ()

    (Northwestern University)

  • Lindé, Jesper

    ()

    (Research Department, Central Bank of Sweden)

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 176.

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Length: 54 pages
Date of creation: 01 Dec 2004
Date of revision:
Handle: RePEc:hhs:rbnkwp:0176
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Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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